Friday, October 14, 2016

The French Factor in U.S. Foreign Policy during the Nixon-Pompidou Period, 1969–1974

by Marc Trachtenberg
"...The crisis, though long expected, came to a head in mid-1971. The new
secretary of the treasury, John Connally, laid out the policy in May. The crisis
would be allowed to develop “without action or strong intervention by the
U.S.” At an appropriate time, the gold window would be closed, and trade restrictions
would be imposed. This would lead, at least for the time being, to a
system of floating rates. The main goal was to get the surplus countries to revalue
their currencies, but the United States would make clear—both for bargaining
purposes and as a fallback position if revaluation negotiations
failed—that it could live indefinitely with the floating rate system.35 Nixon
approved this course of action and wanted to “move on the problem,” not
“just wait for it to hit us again.”36 The new measures were announced on
15 August. The gold window was closed, a border tax was imposed. Nixon
had gone on the offensive. The tone of U.S. policy in this area was nationalistic.
The emphasis was still on getting the Europeans and the Japanese to accept
a substantial realignment of exchange rates, but the goal of systemic
change had not disappeared entirely. According to Shultz, who was in a position
to know, the 15 August package “was designed to be a signal that the
United States was seeking a fundamental change not only in existing exchange
rates but also in the monetary system itself.”37
Shultz’s influence at this time was on the rise. By late 1971, Nixon had
evidently come to share the Shultz view that a major structural reform was
needed and that it would be a mistake to go back to the “old system of parities,
but with different exchange rates.”38 This was probably why the question
of a devaluation of the dollar in terms of its gold price was now so important.
If the price of the dollar could be set in terms of gold, then why should all the
exchange rates not be set by international agreement? That was the old system,
and the basic goal now for Shultz and, increasingly, for Nixon, was to
move on to something better. But Connally, who was being criticized for his rough tactics, was under pressure to settle, and he in effect offered to devalue
the dollar as part of a rate realignment package.39 Nixon, who had made clear
he did not favor devaluation, was angry.40 But the Connally offer could not be
rescinded. A series of negotiations between the West Germans and the
French; then between Nixon, Kissinger, and Pompidou in the Azores; and,
ªnally, in late December 1971 between all the major trading nations at the
Smithsonian Institution in Washington—followed in rapid order, leading to
an agreement that set new parities but did not restore convertibility.
The United States, however, did little to “defend” the new rates.41 Shultz
had taken over from Connally as secretary of the treasury in early 1972, and
the choice not to defend the rates was in line with Shultz’s basic approach to
the problem. His goals were more ambitious than Connally’s had been. He
wanted a fundamentally new system in which the market would play the central
role in setting exchange rates. But he was no Texas cowboy. His methods
were subtle and indirect. He thought of himself as a strategist who sought to
“understand the constellation of forces present in a situation” and tried to arrange
them so that they pointed “toward a desirable result.” The aim was not
to dictate the terms of a settlement but “to get the right process going” and allow
things to take their course.42
Shultz’s style was thus not to force his views directly on other people. He
was a “conciliator and consensus builder” and could “work with almost inhuman
patience to bring a group into agreement upon a decision that all could
support, at times submerging his own preferences.”43 The most striking example
of this was his willingness in mid-1972 to accept a “par value system supported
by official convertibility of dollar balances,” provided the burden of
adjustment was shared equally by both surplus and deficit countries.44 A plan
of that sort (which, however, would also allow countries to “float their currencies”)
was announced in September 1972.45 The plan was well received because it showed that the U.S. government was serious about reform. For
Shultz, however, a negotiation based on this kind of plan was not the only
way to bring a new system into being. For him, the road to reform had two
lanes, “one of negotiations and the other of reality. A conclusion would be
reached only when these two lanes merged and the formal system and the system
in actual practice came together.”46 A system of floating exchange rates
came into being de facto with the collapse of the Smithsonian agreement in
early 1973. The two lanes converged when the reality of the floating rate system
was recognized by the Jamaica agreement of January 1976..."

35. Treasury Paper, 8 May 1971, in FRUS, 1969–1976, Vol. 3, pp. 423–427, esp. 425.
36. Huntsman to Connally, 8 June 1971, in FRUS, 1969–1976, Vol. 3, p. 443. The Nixon tapes provide
some extraordinary insights into U.S. policymaking at this point. Some key passages were transcribed
and presented in Luke Nichter, “Richard Nixon and Europe: Confrontation and Cooperation,
1969–1974,”Ph.D. Diss., Bowling Green State University, 2008, ch. 3.
37. Shultz and Dam, Economic Policy, p. 115.
38. Editorial Note, in FRUS, 1969–1976, Vol. 3, pp. 521–522. See also a letter of 8 September 1971
to Under Secretary of the Treasury for Monetary Affairs Paul Volcker from Shultz’s assistant director,
Kenneth Dam (he and Shultz later wrote a book together), cited in FRUS, 1969–1976, Vol. 3, 179
n. 1, and warning (in the editor’s paraphrase) that “focusing on quantitative goals before agreeing on
the type of international monetary system the administration wanted might constrain long-term options.”
See also Nixon-Kissinger Telephone Conversation, 28 October 1971, in Kissinger Telephone
Conversations Collection, DNSA/KA06727.

"So the whole point of an interventionist policy in this area was not to
help the Europeans with their monetary problems, but to keep the Europeans
from coming together as a bloc. The idea was that the United States might be
able to achieve that goal by selectively intervening on a country-by-country
basis. U.S. officials took for granted that they could not oppose the Europeans
head on: “We couldn’t bust the common float without getting into a hell of a
political fight,” Kissinger said. The United States had to do what it could “to
prevent a united European position without showing our hand.” He emphasized
that this policy was not based on an assessment of U.S. economic interests:
his objection to what the Europeans wanted to do “was entirely political.”
He had learned from intelligence reports that all of the administration’s
enemies in the West German cabinet “were for the European solution,” a disclosure
that pretty much decided the issue for him.76 A year later, at a time
when U.S. problems with Europe were coming to a head, he laid out his
thinking on the issue in somewhat greater detail. “We are not,” he said, “opposed
to a French attempt to strengthen the unity of Europe if the context of
that unity is not organically directed against us. So I am not offended by the
ºoat idea as such, or by common institutions.If, however, it is linked to the
sort of thing that is inherent in the Arab initiative [i.e., the Europeans’ plan at
that point for a “dialogue” with the Arabs, which Kissinger viewed as a hostile
move], as it seems to be, then we have a massive problem. Then we have the
problem that we have got to break it up now.”77"

74. Nixon-Kissinger-Shultz Meeting, 3 March 1973, Tape Transcript, in FRUS, 1969–1976, Vol. 31,
p. 79.
75. Brandt to Nixon, 2 March 1973, in FRUS, 1969–1976, Vol. 31, p. 49; and Nixon to Brandt,
3 March 1973, in FRUS, 1969–1976, Vol. 31, p. 92.
76. Kissinger-Simon Telephone Conversation, 14 March 1973, in DNSA/KA09752; and KissingerSimon
Telephone Conversation, 15 March 1973, in DNSA/KA09779. Extracts were also published in
FRUS, 1969–1976, Vol. 31, pp. 123, 126. The following month another intelligence report about
Brandt was circulated to top U.S. ofªcials. “Apparently,” Federal Reserve chief Arthur Burns wrote in
his diary on 3 April 1973 that “we know everything that goes on at German cabinet meetings.” Arthur
Burns Journal II, p. 60, in FDPL.
77. Secretary’s Staff Meeting, 22 March 1974 (dated 26 March), p. 50, in DNSA/KT01079. Note also
a comment Kissinger made in a 6 March 1974 meeting with Secretary of Defense James Schlesinger:
“I am convinced we must break up the EC. The French are determined to unify them all against the
United States.” See DMPC:Nixon/FDPL.